Playing with Fire

The great default is rapidly approaching. Time is running out. Like a runaway freight train…there’s no stopping it.

To start, the U.S. government is broke. The only thing keeping the lights on in Washington is $1 trillion per year of Fed debt monetization. Without it the Treasury could not pay the bills.

What’s more, it’s impossible for taxpayers to make up the funding gap. The clowns in Congress have made too many promises, to too many people, for far too long. They can’t significantly cut the budget or raise taxes…their reelection depends on spending money they don’t have on programs the people can’t afford.

Regrettably, things are much more grave and dire than most Americans know. They’ve been told they could have a free lunch. What we mean is Americans have been actively misled by the institutions that are supposed to keep the government in check.

Take the Congressional Budget Office, for instance. Its official budget forecasts are mere propaganda for Congress. They’re not doing their job. They are blatantly misleading American taxpayers.

Consider the following…

The Unofficial Debt

You may not know this, but there’s the official debt and there’s also the unofficial debt. The official debt is what’s shown on the books. The unofficial debt is what’s kept off the books.

According to Boston University Professor Lawrence Kotlikoff, “The CBO’s [recently released] forecast was based on its Extended Baseline Forecast (EBF). This forecast assumes current law remains in place, including provisions of current law, like cuts in Medicare and Medicaid doctor reimbursements, which no one, including the CBO, views as realistic.

“In past years, the CBO simultaneously released what it calls its Alternative Fiscal Scenario. This forecast is what CBO actually projects future taxes and spending to be given not just the laws in place, but also how Congress and the Administration have been bending and changing the laws through time. In short, the Alternative Fiscal Scenario (AFS) is what the CBO thinks we’re facing absent a truly dramatic and sustained shift in fiscal policy.

“Those of us who track U.S. fiscal policy eagerly await each year’s release of the AFS. But this year, the CBO’s long-term forecast included only the EBF. The AFS was nowhere to be seen. It wasn’t mentioned in the CBO’s lengthy report. Nor was it included in the downloadable data CBO provided on its website.

“The national media, which generally “covers” fiscal affairs by repeating what it’s told, missed this omission entirely. Indeed, it spent an entire news cycle discussing the EBF figures as if they had real meaning.

“Fortunately, enough people started asking the CBO what happened to the AFS. Within two days a summary of the AFS projections were added as tab 6 in the EBO spreadsheet, with no accompanying press announcement nor any press attention.

“The EBF and AFS projections differ dramatically, yet the AFS is hidden away in one tab of one spreadsheet called Supplementary Data, the small link to which will shortly disappear from the CBO’s homepage [try the link, it’s already gone], making it even harder for we taxpayers to find.”

What you need to understand is this…

Playing with Fire

“Based on the EBF, the fiscal gap is $47 trillion. But based on the AFS, the fiscal gap is — $205 trillion! Hence, in presenting a picture of our nation’s long-term fiscal imbalance based on the EBF, the CBO, in effect, understated the problem by three quarters!

“The $205 trillion fiscal gap is enormous. It’s 10 percent of the present value of all future GDP. Equivalently, it corresponds to 10 percent of GDP year in and year out for as far as the eye can see. To raise 10 percent of GDP each year we could (a) raise all federal taxes, immediately and permanently, by 57 percent, (b) cut all federal spending, apart from interest on the debt, by 37 percent, immediately and permanently, or (c) do some combination of (a) and (b).”

Naturally, there is no chance Congress will do any of these three options in earnest. They may tinker around with budget cuts and tax increases at the margins. But truly addressing the fiscal gap is politically unacceptable.

Thus the Fed will continue to print money and loan it to the government until all hell breaks loose. This debt monetization is extremely disruptive to the economy and financial markets. Eloquently speaking, this is why we are all absolutely screwed.

Incidentally, last Friday was the 90 year anniversary of when “decisive steps were taken to end the nightmare of hyperinflation in the Weimar Republic.” On November 15, 1923, the Reichsbank, which was the German central bank, stopped monetizing government debt. This ultimately succeeded in halting the hyperinflation.

Five days later, Reichsbank President, Rudolph Havenstein died of a massive heart attack. You can read a great account and analysis by Thorsten Polleit of what went wrong here.

Perhaps the heart attack was triggered by Havenstein’s abrupt realization that he’d fatally misunderstood what was happening leading up to November 15, 1923…and how he’d perpetuated the inflation by printing up more and more money to meet an increased demand caused by the mark’s devaluation. No one knows for sure; the heart attack could have been a coincidence. But what is known, is that in Germany, “in 1918 you could have bought 500 billion eggs for the same money you would have to spend five years later for just one egg.”

By 1923, “hyperinflation had impoverished the great majority of the German population, especially the middle class. People suffered from food shortages and cold. Political extremism was on the rise.”

This is the fire the Federal Reserve is playing with in its ongoing debt monetization experiment. Moreover, Federal Reserve chair elect Janet Yellen won’t stop until the dollar’s turned to ash.